States, Federal Government Feud Over Cell-Phone Fees

Arguments about the cell phone bill longer are limited to the kitchen table. State and federal officials are fighting in court over the $100 billion wireless cell phone industry and its 194 million customers. The outcome could affect how customers are billed each month, and how much they're charged

The policy dispute centers on whether states can regulate certain cell phone fees. Under federal law based on the commerce clause of the U.S. Constitution, only the federal government can oversee phone rates. But state officials argue that charges such as "early termination fees" and other, additional line-item charges are under their jurisdiction.

Early termination fees -- applied when users leave cell phone contracts -- can run $100 or more, and the line-item fees cost cell phone users a few extra bucks a month. Consumer advocates say these fees resemble taxes and can mislead cell phone customers into believing they are paying the wireless companies less than they are.

In response to complaints, a handful of states have instituted protection measures for wireless users. Louisiana barred telecommunications firms from automatically renewing wireless contracts, forcing them to go month-to-month with consumers until both sides agree to another deal. Minnesota requires cell phone companies to get users' permission before extending or altering their contracts, a law that is being challenged. And Rhode Island cell phone customers enjoy a 30-day grace period before accruing late fees.

In neighboring Connecticut, lawmakers passed a measure that would give irate cell phone users an outlet. As of Oct. 1, all mobile phone complaints would be handled by the state's Department of Public Utility Control. The same act would force cellular companies to obtain users' permission before giving out their phone numbers -- a preventive measure aimed at talk of creating a cell phone directory.

"I didn't want them (wireless companies) to start doing directories without some way to protect the consumers," said Connecticut state Rep. Ruth Fahrbach, who co-sponsored the bill. A directory means more phone calls, and because consumers have to pay for those calls, a directory could be a "profit windfall for cell phone companies."

Connecticut isn't the only state showing caution. There are similar privacy protections in Georgia, Washington and Texas, said Kerry Smith, an attorney who handled the cell phone debate for the State PIRGs , a consumer advocacy group. Plus, there are efforts to pass a cell phone users' "Bill of Rights" in Illinois, Massachusetts, New York and Wisconsin, she said. California had a similar "Bill of Rights," but the state's utility commission suspended the protections earlier this year.

The federal government also has acted. In March, the Federal Communications Commission outlawed "deceptive phone charges," or fees that resemble taxes. The FCC also prohibited states from applying their own rules to these charges. And the agency said it is reviewing state regulation of early termination fees.

Rather than view the FCC action on fees as a victory, state officials and consumer advocate groups said the ruling was vague and hard to enforce. A coalition of state officials and consumer advocate groups sued, arguing that federal authorities have been lax in policing these fees and that states can do a better job.

Now the matter is before the 11th U.S. Court of Appeals in Atlanta, which could decide the matter before the year closes.

"I think for consumers it (the FCC ruling) means that if they have a complaint about their service, or the bill, or the carrier's responsiveness, then they are not going to be able to go to states anymore," said Patrick W. Pearlman, the lead attorney on the line-item issue for the National Association of State Utility Consumer Advocates . "They are going to have to talk to the FCC. And the FCC hasn't been consumer-friendly, and we don't have reason to say that is going to change."

Pearlman's position is supported by the National Association of Attorneys General, which has argued in court filings that "state enforcement authority is independent from federal authority and necessary in a competitive market."

Indeed, last year more than 30 state attorneys general negotiated a court settlement with three large wireless carriers that requires these companies to advertise their services more accurately, provide precise maps of coverage and give their customers an opportunity to test cell phones for two weeks without penalty.

Federal officials and industry representatives counter that state regulations and bureaucracy would only stifle innovation and make owning a cell phone more expensive. And it would only duplicate consumer protections created by the industry itself, they said.

"Wireless service is inherently an interstate service," said former FCC Chairman Michael Powell in a statement following the March order. "As a result, it is simply not sustainable to have a multitude of divergent, and at times intrusive, state-by-state billing regulations."

Powell has since been replaced Chairman Kevin Martin, although the switch is not expected to drastically change the commission's stance on the issue.

The commission's view is supported by the wireless industry, which has joined the court fight over the fees. The companies argue that state officials have concentrated on this issue to draw attention away from state and local taxes on cell phones -- which can climb as high as 21.7 percent, as they have in New York state.

"We think there is strong, strong evidence in support of the federal framework and we haven't heard of a good framework for changing it," said Joe Farren, spokesman for the CTIA-The Wireless Association, an industry advocate.

If states are allowed to create their own rules, "wireless will have to set up separate state-by-state operations. It increases costs, and it delays innovative product rollout," he said.

Annabel Dodd, author of The Essential Guide to Telecommunications, said this dispute could harm consumers -- no matter which side the appeals court favors. "The downside of giving the power of regulation to the states is that it raises costs for the cellular carriers. And guess who they pass those costs along to?" Dodd said. "It's a no-win situation."

About The Pew Charitable Trusts

The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public and invigorate civic life.

Trust Magazine

Our quarterly news magazine. Every issue features articles on Pew’s work from across the organization.Read current issue ›